Question

1.

You own a stock portfolio invested 25 percent in Stock Q, 20 percent in Stock R, 10 percent in Stock S, and 45 percent in Stock T. The betas for these four stocks are 1.2, 1.51, 1.66, and 0.46, respectively. What is the portfolio beta?

2.

Answer 1

1. The portfolio beta is computed as shown below:

= Beta of stock Q x weight of stock Q + Beta of stock R x weight of stock R + Beta of stock S x weight of stock S + Beta of stock T x weight of stock T

= 1.2 x 0.25 + 1.51 x 0.20 + 1.66 x 0.10 + 0.46 x 0.45

= 0.975

2. The expected return on the portfolio is computed as shown below:

= Expected return on stock A x weight of stock A + Expected return on stock B x weight of stock B

= 0.13 x [ $ 1,900 / ( $ 1,900 + $ 4,000) ] + 0.15 x [ $ 4,000 / ( $ 1,900 + $ 4,000 ]

= 14.36% Approximately

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